Sticking to your strategy is much harder than forming it

Investing involves a multitude of various investors, consumers, companies, managers, employees, fiscal and monetary policies, weather, disasters, your own psychological biases, and not least chance. Investing is thus like playing a multi-dimensional board game, with considerably more moving parts than in a game of Go.

n my book about 15 years at the best performing hedge fund in Europe over a decade, I list 50 rules of investing.

Over the coming weeks, I intend to go through and explain twelve of my most important insights from that time. Taken together I believe they will make for a useful inspirational reminder for enhancing your investment habits.

Strategy means having, and systematically and consistently complying with a system for investment decisions, rather than relying on intuition and gut feeling.

Others prefer value-agnostic methods, based on, e.g., momentum or specific share price patterns. In theory, you could make money that way in any market environment. Yet others rely on asset class diversification with fixed rules for adjusting the relative weights.

Some investors focus on macroeconomic information, while some prefer pair trading, focus on special situations or risk arbitrage. A select few have chosen more or less complicated derivatives strategies.

There is no one optimal investing strategy. You can get rich or poor fast with any of the mentioned strategies.

Many strategies can carry the required load on the financial markets; and different strategies work better for different individuals or institutions. It’s consistent execution of the chosen strategy that leads to exceptional results.

Hence, you should choose a strategy – logical, rational and back-tested – and modus operandi that you are comfortable with trusting in good times and bad, neither amending your sizing, risk tolerance, asset allocation or positioning during streaks of good luck, nor in streaks of bad luck.

Practice

Form a strategy

Stick to it

However, do adjust the strategy deliberately if needed; but don’t deviate from it in ad hoc fashion based on emotional reactions to particular circumstances or stress.

Strategy.

My own strategy is based on thorough fundamental research on individual companies. I want to buy fair companies at a fantastic (low) price, including unproven start-ups with great ideas at very low market capitalizations. I tend to find it difficult buying great companies at great prices, mostly since I find it difficult to identify truly great companies without their prices being insane – a price point I’ve never been able to stomach.

I typically trade (buy or sell) in increments over a fairly long period (sometimes weeks, sometimes years), mostly to avoid the psychological blow of buying or selling the entire position at the wrong price right before an important (unknown) event, partly to enable trading on share price overshooting, and finally in order to learn more about the company before becoming psychologically stuck.

In addition, I trade around long-term positions whenever the share price overshoots or undershoots due to news or movements in the general market.

I’m always prepared to lose money, albeit not bond-pit trader style like Mark Spitznagel, but rather as part of reality’s natural tendency toward an unpredictable range of outcomes. To insure against too large losses, I diversify across a range of assets, such as my apartment, physical gold and platinum options, private companies in a range of industries and stages, private bonds/loans, and listed stocks in various sectors.

I combine my bottom-up investment style with a top-down view of the general economy, as well as an overall view of the stock market (in particular the median valuation level, and trend convergence of technical gauges), in order to decide on my overall risk level and how to weight the various slices of my investment pizza.

In short, my strategy can be summarized thus:

Fundamental bottom-up value-based stock picking

Averaging in and out

Position trading

Overall market valuation

Overall market trend

Top-down macroeconomic overlay

Quattro Stagione asset class diversification pizza portfolio

My Strategy:

Right now the stock market is insanely expensive and technicals point to a trend change downward. Hence, I’m underweight listed stocks (actually net short including my XACT BEAR position). Nevertheless I’m long a few gaming companies with strong momentum, a hype/hope biotech stock, a nuclear energy consultancy stock and the Uranium ETF: URA.

Real interest rates are negative, and fiat currencies seems overdue some kind of re-set, explaining why I’m overweight precious metals (options on physical) as insurance against long term mayhem.

I have lent out money, with a large margin vs. policy and market rates. If the economy improves and interest rates rise, my rates rise too. If the economy weakens, I’ll just have to hope my friends can keep their jobs. I’m overweight this kind of junk/friend private bond market due to extremely good rate margins, despite a half-decent macro outlook for Sweden.

I’m neutrally weighted private companies, even if it sometimes feel like I’m overweight – probably due to my low current weight for listed stocks. Listed stocks are expensive, while certain sectors and classes of small private companies are quite cheap – not to mention restricted to few well-connected investors. Hence, I have focused my investments during retirement more and more toward private companies within, e.g., HR software, consumer motor/water sports, medtech, retail and a few others.

My guess is I’ll keep increasing my weights in private companies in tandem with the economy getting weaker at some point in the future, and me thus getting more and more calls for investments. After that I hope to reap handsome rewards starting in 2020 and going forward. Hopefully several of my private investments will become public around then. In 2022 I’ll turn 50 and some time around then, my strategy is to do more travelling and spend less time on risky investments again… for a while.

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16 Comments

Hi Mike! An eager reader and listener (25mins) from NO here. Care to share some examples on what kind of valuation multiples you consider fair? What would be tolerable multiple for, say, Kopparberg, Ikea, H&M, SEB, Volvo, FP, for instance (or, more generic, what are reasonable multiples for growth companies (15-25% p.a.), debt heavy companies (if applicable), etc.). I recon PE is #N/A when looking at startups for instance (price/sales, then? Or EV/EBITDA?). Eventually; do you always model CFs in a DCF model when you invest in equities? Appreciate if you could share your thoughts on the topic – apologies for bombarding you with q’s.

Hi Mike! An eager reader and listener (25mins) from NO here. Care to share some examples on what kind of valuation multiples you consider fair? What would be tolerable multiple for, say, Kopparberg, Ikea, H&M, SEB, Volvo, FP, for instance (or, more generic, what are reasonable multiples for growth companies (15-25% p.a.), debt heavy companies (if applicable), consumer staples, etc.). I recon PE is #N/A when looking at startups for instance (price/sales, then? Or EV/EBITDA?). Eventually; do you always model CFs in a DCF model when you invest in equities? Appreciate if you could share your thoughts on the topic – apologies for bombarding you with q’s.

Hi Mike! An eager reader and listener (25mins) from NO here. Care to share some examples on what kind of valuation multiples you consider fair? What would be tolerable multiple for, say, Kopparberg, Ikea, H&M, SEB, Volvo, FP, for instance (or, more generic, what are reasonable multiples for growth companies (15-25% p.a.), debt heavy companies (if applicable), consumer staples, etc.). I recon PE is #N/A when looking at startups for instance (price/sales, then? Or EV/EBITDA?). Eventually; do you always model CFs in a DCF model when you invest in equities? Appreciate if you could share your thoughts on the topic – apologies for bombarding you with q’s.

There are no absolute answers. Sometimes EV/EBIT is applicable, sometimes MarketCap/Equity is a better ratio. It depends on the nature of the business, of the level of growth, of the structure of the P&L and BS, respectively. Sometimes a P/FCF is best. Sometimes a triangulation of several is preferred, but not always.

Once the best multiple is determined (“best” being a historically good predictor of future returns) find the relevant levels by comparing it to peers, to its own history and so on – some absolute gauges, some relative.

I can’t answer better than that in the comment section. I mean, you’re really asking me to explain how the entire stock market works :D

Appreciate the feedback – I guess the “it depends” answer reflects that there are no firm answers in the market. And by the way; apologies for spamming your comment section (received an error message every time I tried to post my comment and didnt think they got through).